Pound's reaction to leaks on Brexit (Daily analysis 22.11.2018)

The morning peace is disturbed by reports on Brexit. The pound is appreciating, but the situation of the British currency remains uncertain. Good retail data with limited impact on the zloty.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Uncertainty

In the morning one thought that it would be a rather peaceful day on the currency market. The US session ended with mixed signals. There was news from Italy that there would be changes in the budget, but the details were not known. Moreover, in the United States markets are closed for Thanksgiving Day, so the Americans will not be shaping the direction of changes in global assets. Also, reports on Brexit after yesterday's meeting of Theresa May - Jean-Claude Juncker did not announce a breakthrough. However, in the latter case, the situation has changed.

Bloomberg and later other media began to report that the negotiators worked out changes in future relations between the UK and the European Union. According to the incoming information, in the absence of a new trade agreement (the one to be negotiated), there will be no need for too close relations between Northern Ireland and Ireland in the backstop mechanism. In the previous version, the fall-back mechanism had many elements consistent with the common market. This could put other regulations in Northern Ireland and the main British island at risk or would force the UK as a whole to stay too close to the EU.

It should, at least in part, reduce the fears of the eurosceptic part of the Tory. The opposition within the party may, therefore, be smaller. It is difficult to say how the Northern Ireland DUP party will behave because the Northern Ireland issue remains practically unresolved. Only the concept of dealing with the problem using technological solutions, which are currently not available, came up again. This is a gesture to the eurosceptic party members, but it is doubtful that the DUP would support such an initiative.

Apart from the voting problems in the UK, it is not clear whether the agreement will be supported by the 27 other Member States of the Union. There is no reference concerning the relationship between Spain and Gibraltar, and the question of fishing between France and the United Kingdom remains controversial.

Initially, the pound reacted to information with a strong increase (from less than 1.28 to more than 1.29 in relation to the dollar). Later this movement was almost completely negated. In the early afternoon, the GBP/USD pair is again around the 1.29 boundary. Overall, it seems that some progress has been made in the negotiations and the chances of the House of Commons voting through the plan have increased. On the other hand, however, the chances probably still do not exceed 50%. Therefore, maintaining these increases is exposed to serious risks, and it is possible that a strong change in the pound's valuation is still ahead of us.

Stable zloty

The zloty behaves stable. Changes in relation to the euro or the dollar are limited. Most movements are related to events connected to the pound and some progress in the context of an orderly Brexit. In the early afternoon, one euro costs about 4.30 PLN.

Excluding external issues, it is also worth noting the GUS data on retail sales for October. It was clearly better than expected by economists (7.8% growth vs 5.8% y/y after inflation). Looking at the categories, car sales increased strongly (by almost 10% y/y), while other categories grew at a pace close to the average since the beginning of the year, which should be considered a very good result. In the following hours, the zloty should remain stable, especially as there will be no signals from the USA due to Thanksgiving Day.